Earnings Call Transcript - LRN Q2 2025

Operator, Operator

Good day, everyone, and welcome to the Stride, Inc. Q2 FY 2025 Earnings Call. Just a reminder, today's call is being recorded. I would now like to hand things over to Mr. Tim Casey. Please go ahead, sir.

Tim Casey, Executive

Thank you and good afternoon. Welcome to Stride's second quarter earnings call for fiscal year 2025. With me on today's call are James Rhyu, Chief Executive Officer; and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. A reconciliation of these measures is provided in the earnings release issued this afternoon and can also be found on our Investor Relations website. In addition to historical information, this call may also involve forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to several important factors as described in the company's latest SEC filings. These statements are made on the basis of our views and assumptions regarding future events and business performance at the time we make them, and the company assumes no obligation to update any forward-looking statements made during this call. Following our prepared remarks, we will answer any questions you may have. Now, I'll turn the call over to James. James?

James Rhyu, CEO

Thanks, Tim. We have once again posted record enrollments, capturing 230,000 students. We continue to execute against the backdrop of ongoing strong demand. Coming out of the pandemic, we were all uncertain if the increase in demand for our programs was structural or temporary. For three consecutive years now, we have seen increasing growth in our business. Additionally, for three consecutive years, we see continued in-year strength in demand. The macro environment for our business is as strong as ever. As long as we can continue to execute effectively, I believe we can benefit from these conditions. While every business has challenges, most of ours are currently within our control. Many of our significant challenges involve simply improving and executing well, not just in how we have traditionally run our core business, but across all our initiatives. This includes initiatives that can elevate our core business to a new level while also providing us with new market opportunities. We see early signs that our investments will pay off, but we need to remain vigilant to ensure we are setting ourselves up for success over the long run. I remain very bullish on our prospects for future growth. We're witnessing continued demand for our core offerings, growing support for school choice options, and a student base seeking real career training. As a company, we're in a strong financial position and have an incredible team committed to delivering for our customers. Thank you. I will now turn the call over to Donna.

Donna Blackman, CFO

Thanks, James, and good evening. This quarter confirms we're now in our third year of end-year enrollment growth in our full-time programs. We've talked a lot about market conditions that are pushing families to seek education alternatives, and our results demonstrate that our programs can be an effective solution for many of these students. In light of this continuing strength, we're raising both our revenue and profitability guidance for the full year, which I'll cover in more detail later. Turning to our quarterly results, we reported revenue of $587.2 million, an increase of 16% from the second quarter of fiscal year '24. Total average enrollments were 230,600, up 19.4%. Adjusted operating income was $135.6 million, up 43% from last year. Earnings per share reached $2.03, up 32% from last year, and capital expenditures were $14.8 million, up from $12.7 million last year. Revenue in our career learning, middle, and high school programs grew 29% to $213.1 million. This strength was driven by enrollment growth of 30.9% year-over-year. General education revenue was $354.3 million, up 13% from last year, also driven by continued enrollment growth in the quarter. Average enrollments were up 12.5% from last year to 135,800. During the quarter, we saw accelerating enrollment growth in both of these lines of revenue. As mentioned previously, this is the third consecutive year we've seen strength in in-year enrollments. Total revenue per enrollment across both lines was $2,395, essentially flat compared to last year. As we noted last quarter, we're seeing some impact from state mix, although the funding environment remains largely positive. Given these dynamics, we expect to finish the year with revenue per enrollment down 1% to 2%. Softness in our adult learning business continues, and we finished the quarter with revenue down $6.1 million from last year to $19.8 million. Gross margins for the quarter were 40.8%, up 100 basis points from last year. We expect gross margins to improve by 100 to 200 basis points for the full year. Selling, general, and administrative expenses decreased marginally to $114.8 million. While we've seen declining SG&A spend in the first half of the year, I expect to see some increases in the second half. We should finish the year slightly up compared to FY'24. Stock-based compensation for the quarter was $7.9 million. We now expect to finish the year with stock-based compensation in the range of $33 million to $37 million. Adjusted operating income for the quarter was $135.6 million, up 43% year-over-year. Adjusted EBITDA was $160.4 million, up 36%. Interest expense for the quarter was $2.7 million, and our effective tax rate was 25.7%. Diluted earnings per share for the quarter were $2.03. Our EPS calculation includes incremental shares related to our convertible notes on an as-if-converted basis for GAAP reporting. These shares are included in our diluted share count but are not yet issued. However, some of the dilutive impacts of these shares will be offset by the capped call transaction we completed at the time of the note issuance, up to an upper strike price of $86.17 per share. We're now including a table in our quarterly investor presentation showing the potential dilution from our convertible note at various share prices, as well as the offset from the capped call. Turning to our balance sheet and cash flow, capital expenditures for the quarter were $14.8 million, up from $12.7 million last year. Free cash flow, defined as cash from operations less CapEx, was $208.6 million, up $48 million from the prior year period. We finished the quarter with cash and cash equivalents of $515.1 million. Given the continued growth in enrollments and margin improvements, we are raising our full-year revenue and profit guidance, now expecting revenue in the range of $2.320 billion to $2.355 billion, up from $2.225 billion to $2.3 billion last quarter. Adjusted operating income is expected between $430 million and $450 million, up from $395 million to $425 million last quarter. Capital expenditures are expected to be between $60 million and $65 million, unchanged from last quarter, and the effective tax rate is projected to remain between 24% and 26%, also unchanged from last quarter. For the third quarter, we forecast revenue in the range of $585 million to $600 million, adjusted operating income between $130 million and $140 million, and capital expenditures between $15 million and $17 million. Thank you so much for your time this evening. I will now turn the call over to the operator for Q&A.

Operator, Operator

Thank you. We'll go first to Jason Tilchen from Canaccord Genuity.

Jason Tilchen, Analyst

Great. Congrats on the strong results and thanks for taking my questions. I have two, if there's time. The first, I'm just wondering if you can unpack some of that enrollment momentum a little bit, maybe talk about some of the differences in the funnels you're seeing for career learning and general education and how some of the enrollment numbers on a gross basis are trending versus how retention has been compared to last year?

James Rhyu, CEO

Yes. Hey there, Jason, it's James. I think the basic trend we continue to see is across the board strength in our enrollment funnel. We've been a bit surprised by how strong it continues to be year-over-year. We're in the third year of year-over-year growth. I think we're executing well against it, but I believe a lot of the underlying demand is incredibly strong and broad-based. If there is a weak spot, which we have said repeatedly, it's that the incremental career funnel has not materialized as strongly as we would have expected or hoped. We believe that longer-term it continues to be an opportunity for us. But if there was a weakness, that would probably be it.

Jason Tilchen, Analyst

Great. That's really helpful. And just one follow-up, you recently announced the rollout of K-12 tutoring nationwide. I'm just wondering if you could share any early learnings from that rollout and any additional color on how the go-to market is going to develop there when you expect sort of more material contribution from that on the overall business? Thanks.

James Rhyu, CEO

Yes. For us, it's a clearly adjacent business. If you think about other businesses like a DoorDash or something that has gross merchandise value and then net revenue. We have a similar dynamic with our tutoring business where we have gross tutor value but we record everything on a net basis. In terms of our financial statements, I think for quite a long period, it will be immaterial. But strategically, it can be very important because we know that high-dose tutoring is effective for learning. We have a terrific pool of educators within our network who can leverage these through the platform. It also provides those teachers opportunities to earn more. We've seen numerous cases, both within our programs and outside of our programs in district programs where they're using our tutoring product, and they're very satisfied with and achieving tremendous outcomes. While I don't know in the short term it will be financially significant, I do believe it continues to be strategically significant. We're committed to investing in that product. Unlike other tutoring companies, tutoring isn't their sole product, and they must make margins to survive. We don't have that constraint. We can invest in and grow this product and test various innovations on our platform. We've recently rolled out an AI summary feature that has received positive feedback. Overall, we're pretty pleased with it.

Jason Tilchen, Analyst

Great. Really helpful. Thanks a lot.

Operator, Operator

And we'll take the next question from Jeff Silber, BMO Capital Markets.

Jeffrey Silber, Analyst

Thanks so much. Just wanted to drill down a bit on the prior question. There's not a lot of good industry data out there, but from what we've been able to see, you guys have really been dramatically outperforming the industry. Is there anything specific that you're doing that maybe some of your competitors are not to drive that outperformance?

James Rhyu, CEO

Yes. Hey, Jeff. I tend to agree with you. The data we see suggests that we're likely over-indexing on industry performance. I don't want to say this negatively; I want the entire industry to grow as well. I think that should be our primary goal. That said, I credit our team's execution. You may remember that just a couple of years ago, I discussed execution issues that hampered our growth. We’ve fixed those issues and as a result, we have accelerated growth. We've been executing significantly better. When you execute well in any industry or company, you have the opportunity to take market share. I believe that's what is happening to some extent. The good news is, while we're executing better, I see ample opportunity for further improvement. We're not resting on our laurels.

Jeffrey Silber, Analyst

All right. That's helpful. If I could switch gears and talk about the funding environment, we've been seeing a lot of noise out of Washington regarding freezes or pauses, etc. I know you don't get a dramatic amount of revenues directly from the federal government, but is there anything that indirectly comes to you from Washington through the states? I'm just wondering what kind of exposure you might have? Thanks.

James Rhyu, CEO

Yes. Our exposure is very limited, well less than 5%. We observed that our exposure remains the same. Regardless of what the administration announces, I want the focus to be on helping students. I believe that the administration will try to support student needs. We're prepared to manage any impacts, whether negative or positive. The intent of empowering states discussed in the administration's goals aligns with our focus on student support, and we aim to support measures that help students.

Jeffrey Silber, Analyst

All right. Really appreciate the color, James. Thanks.

Operator, Operator

We'll take the next question from Alex Paris, Barrington Research.

Alexander Paris, Analyst

Hi, guys. First off, I'd like to ask a couple of clarifying questions. In the first question, James, you responded about strength across the board in enrollment. I'm presuming you're talking about new student enrollment. The question would be, how has retention been faring?

James Rhyu, CEO

Yes. Retention, I think a couple of years ago, we talked about how we observed a structural improvement in retention post-pandemic. Generally speaking, that trend continues. We're seeing retention numbers year-over-year that are roughly in the same ballpark. We're not experiencing ongoing dramatic improvements like we saw previously, but the retention gain is more long-term, meaning we're identifying structural areas of our program for improvement based on feedback that can enhance long-term retention. One valid concern is the lack of socialization in virtual programs, which we're addressing by investing in platforms allowing students to safely interact, such as our K-12 zone. We're focused on these initiatives believing they will yield long-term benefits for retention.

Alexander Paris, Analyst

Great. That's helpful. And then on that same question, you mentioned earlier that the incremental career funnel has not materialized as strongly as expected. However, I see the career learning enrollment is up 31% year-over-year. Did I misunderstand your response, or could you offer more detail?

James Rhyu, CEO

No, you understood my response correctly. Despite the strong numbers, I strongly believe our career programs, if executed well, can position students for career readiness upon graduating high school. The macro trends in education support this need, and the corporate industry dialogue reflects this as well. The market opportunity for those programs is substantial, but we need to effectively capture it. I believe there’s still a larger upside opportunity if we improve our market efforts.

Alexander Paris, Analyst

Great. Good to hear. Last question, and I hate to focus on the only negative aspect in this report. Adult revenues were soft, $19.8 million, a little below where they were in the first quarter. Could you clarify the makeup of that segment? I'm aware there are two Boot Camps and MedCerts. What proportion does MedCerts represent? Any color would be helpful. I realize it's a small percentage of the total, around 4% on a last 12-month basis.

James Rhyu, CEO

Yes. We're not going to specify the percentages. We're certainly disappointed in the softness of the business. One factor, which is not an excuse for our performance, particularly for the MedCerts business, is that long-term, it is better designed as a B2B type of business. Historically, it has been primarily B2C. We are transitioning it into a more B2B-focused model. We believe this transition will lead to a more structurally solid business with less churn and more stable contracts. While the decline may be immaterial now, we remain invested in these businesses, believing in their long-term value creation for our shareholders.

Alexander Paris, Analyst

Great. And then just one more clarification question. In answering about federal funding, you mentioned it's well less than 5% of revenue. Is this related to ESSER, or are there other funding sources such as Title I?

James Rhyu, CEO

Yes. That's a good question. There are indeed other funding streams involved. ESSER is essentially negligible for us now, so it shouldn’t be a focus. There are minimal amounts flowing in from federal dollars beyond previous ESSER funding.

Alexander Paris, Analyst

That's great. Thank you for answering my questions, and congratulations on a strong quarter.

Operator, Operator

We'll go next to Stephen Sheldon from William Blair.

Matthew Filek, Analyst

Hey, Jason and Donna. You have Matt Filek on for Stephen. Great results this quarter, and thank you for taking my questions. Has your optimism about being able to open new schools in new states changed at all, especially with the President advocating for universal school choice? Just curious about your thoughts.

James Rhyu, CEO

Yes. I try to keep us focused regardless of changing administration. You heard this a few years ago and you will hear it again. I attempt not to be swayed by political changes in how we run the business because it's ultimately a state-level approach. The current tone and intent of this administration generally support school choice and similar programs. That could be a positive halo effect for our business. However, I don't anticipate that the administration will specifically advocate for our programs in any state. If there is a positive influence, we intend to capitalize on it, but I don't see it materializing just yet. It’s our belief that the plan is state-driven. The current administration aims to help students, which is beneficial to the country. Ultimately, we're focused on operating effectively under all conditions.

Matthew Filek, Analyst

Got it. That's a helpful explanation, James. Thank you. I wanted to ask about career learning. You've previously mentioned your desire to expand pilot programs in skilled trades like plumbing and HVAC repair. Could you elaborate on this opportunity?

James Rhyu, CEO

Yes. We have already run a couple of tests. Early indications suggest we still have much to learn. The overall demand for skilled trades appear to be growing, which is crucial for the country. It's a viable career track for many without incurring college debt. We see potential and will continue exploring it. We want to proceed cautiously so as not to make significant bets on items that don’t materialize due to improper testing. This trend is not going away anytime soon. There's time for us to carefully determine effective ways to play in this market.

Matthew Filek, Analyst

Okay. Sounds good. Lastly, I wanted to confirm, are any schools nearing enrollment caps considering the strong growth in recent quarters?

James Rhyu, CEO

We always address programs with enrollment caps; this is not new. Fortunately, most caps are not long-term fixed. There are two types of enrollment caps: government imposed and partner-imposed. In both cases, we generally have productive conversations to increase caps when demand warrants it. We have successfully raised caps in the past when justified by demand, meaning where there’s unmet demand and no alternative mechanisms available for students. We aim to serve students, and that justifies raising caps. We’ve been successful historically, and we expect to continue this approach.

Matthew Filek, Analyst

Great. Thank you, team. Appreciate the time.

Operator, Operator

And that does conclude our question-and-answer session. That also concludes our conference for today. We would like to thank you all for your participation. You may now disconnect.